The Global Trade

Shawn Baldwin from CMG in Chicago for the 2009 Critical Capital Management Series

The Global Trade


April 9 2009 Commentary 

 The FOMC released their expectations based on their findings, needless to say the results weren’t good. The report had a negative outlook that was based on deflation expectations, lower payroll, decreased bank lending and reduced foreign activity. I could have saved them the time, effort and energy and told them that in March.

As we continue to wait for the “what” to occur in the U.S. to settle the upturn of the US Stock Market it will be prudent to focus on international markets. Institutional mandates are increasingly for global equity funds and they have increased in dramatic fashion over the past decade. 1st quarter net inflows were $3.2T versus $59B to developed nations. The data from institutional investors is clear: The opportunities will be in the emerging markets.

Emerging markets are robust and there is a huge difference between developing markets and emerging ones. The MSCI (Morgan Stanley Index) is up 10.6%, the UK liquidity overhaul threatens the London financial center and the focused coordination/regulation of banks will create consolidation of financial institutions in Switzerland. The largest bulk of returns generated by the top performing alternative investment managers is being generated by the “Emerging Managers”. Forget the traditional places and waiting on developed places like Japan to finally hit (the Bank of Japan Tankan still shows deteriorating business conditions). The returns for emerging markets will be the highest in this environment and can be replicated by US retail investors.

The opportunities will be abroad. Veteran Roger Altman whom I shared a plane ride with once(yes he was on a commercial plane-yes, I talked his head off) recently did a deal with CITIC to focus on doing cross border deals, expect to see more of these collaborations in the future. A lot more. Deals like this were the center point of discussion at the G20–the world leaders are eyeing cross-border deals very cautiously amongst other taxation revenue opportunities.

The success of the G-20 summit was a mixed bag depending on who you heard from. Essentially what they did agree upon decisively was that they need to have a global regulator for cross border financiers such Roger and I, ways to limit hedge funds and on how to clamp down on tax havens— does any of this assist the financial crisis? Not at all, but it allows everyone to declare a victory since the global leaders all have a need to gather tax revenue and regulatory fees. This would seem to be the harbinger of no new economic growth from anywhere.


The G-20 quadrupled support to the IMF (for developing countries) making total support $1 trillion dollars while also agreeing to support the IMF with tighter regulations at home along with $250B for trade finance. This mandate in particular seems hollow and can only honestly be seen as a composite number for the next 2 years, most of the trade is financed by companies and not the IMF. The G20 received Special Drawing Rights (SDR)—the IMF’s reserve asset–for a basket currency (dollar, euro, sterling, yen) by the IMF for global management of liquidity. This will allow emerging countries to run current account deficits like the U.S. and Great Britain. This is very important and will help to minimize the contagion and reduce potential negative effects from the less developed countries need to export to the more developed countries which have superior current account deficit systems. I know it sounds tricky but trust me—I’m right. This also assists smaller countries and reduces foreign currency impact against them.

The ECB’s Trichet dropped the interest rate to 1% from 1.25% and he will most likely cut it again as the UK credit begins to loosen and shows signs of thawing. Trichet will most likely reduce the 1% by May and the Trichet only dropped the 25 basis points to give himself room for further actions in the future. Leaving more room for cutting will strengthen the euro — that is a solid trade. Trichet has less of a need for aggressive action at the present time due to inflation in the eurozone countries. Inflation in the Eurozone is decreasing to record lows. This will boost the Eurozone, so you can definitely expect greater reductions in May. Further options can include buying both corporate and government debt. This will present a small problem since the ECB prefers to be neutral and not display any favoritism; which could result in all countries being bought in equal amounts but from a theoretical position that would reduce the effectivesness and cash and therefore is not likely.

We will see the bank notes and deposits growing in the euro from easing (buying of instruments) The Repo rate shrank to 1% lowest as it was dropped .50 bps. The ECB will be reticent to buy debt due to their interest rates being below the rates in the US, where inflation is most likely to turn negative. These actions will most likely shift more economic power to emerging markets.

The United States seemed to have formed a hedge for potential Forex mismatch. The FED made deals for almost $300B in Euros, Yen, Swiss Francs and Sterling for the purpose of potential lending to their TARP inflated constituency of U.S. banks. These currencies supposedly have been gathered for potential auctions and loans—stay tuned for those. I believe that this was done for distributing to US Banks in times of currency flux. I also believe that the contagion is far more systemic than western banks, only the future will show us what awaits. Although the move by the Fed seems to be a harbinger of mismatched needs and trades—if the Fed can’t meet its needs– current financial problems will be exacerbated. If the Forex markets become illiquid this will create some relief and circumvent more hiccups in the financial system while insuring that US banks can compete globally if asset disposition sales do not go quickly and smoothly. A very nice insurance policy.

The IMF estimates total losses on US assets roughly around$2.8T with losses from European assets about $1T, these combined along with some losses from premature bets in Japan put total losses to the IMF at $4T Central and eastern nations (Ukraine, Latvia, Hungary)were encouraged to adopt the euro per the advise of the IMF—without formally joining the eurozone. The ECB believes that this will circumvent regional crises. It is uncertain how this will actually help since the bulk of eastern European countries have foreign debt. In adopting the Euro the debt will simply be re-denominated but this will not guarantee stability. If anything a single currency will reduce optionality and tie the countries fate to depend either on exports or capital inflows—not a good situation to be in. Finally, I am sure that these actions will actually weaken the Maastricht treaty—I am almost fairly certain that the IMF with it’s newly enhanced special powers will offer far more palatable solutions.

One thing that should have been on the agenda, aside from the protesters sundry desires for change in focus on something other than finance, were effective policies to avoid protectionism which will slow down progress more than anything. Government stimulation is the equivalency of what is affectionately known as a salt water trade—you can drink it when you are thirsty, but it is slowly killing you. Global trading and open borders are the cure for a bogged down economic world with a need for revenue and GDP –not protectionism.


There was also a conspicuous absence of stimulus targets as President O desperately wanted to position for but decided to back off of, no banking reforms for the greedy and naughty bankers (I absolutely love the word naughty!) who caused the debacle in the first place nor were there any actions to stem that from occurring again in the future. The idea of a global regulator sounds nice…at least until you begin to reality test it and the more that you inject it into reality, the more the idea begins to sound preposterous. I believe that we will have to settle for coordination since a regulator would have to have international reach, be beyond reproach and have zero loyalty to any flag or institutional finance group on the planet—the only people who would fit that bill are the protesters who were staging the fake bloody heads at the G20 in London. Fat chance.

In terms of coordination I reserve the right to be less than enthused or amused—when you bear in mind that European banks have been trying to coordinate for years — to this day they are STILL trying. As we push down through the G8 industrials we know that these countries have been “implementing” BASEL standards as BASEL II begins to look fairly long in the tooth. Please don’t have high expectations here for effective “global coordination”. Do as the world leaders are doing: Grit your teeth and hope for the best—only you won’t take a picture with Barack as you are doing it.

If we desire to see any real rule implementation, it seems as though we will have to wait for the John Maynard Keynes creation — Bretton Woods for that. In all truth and fairness that is how it should be. With the next meeting set in September and no set trade accord- For now the group seemed to be happy to basking in the Obama international limelight. While they were focusing on taking pictures with our internationally, wildly popular US President the real consensus was to push of the next bit off work to the World Bank and the IMF. Only one thing is certain from the G20-Global Financial Power will clearly shift from the United States. Next up: Public Private Partnerships (PPP) and Global Liquidity solutions

About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago.